Is VC Funding Right for Your Business?

Funding from a venture capitalist, or VC, may be an appealing option for entrepreneurs with aggressive plans to scale their businesses. For some, VC funding comes with benefits that extend far beyond access to capital, including mentorship and industry expertise.

While the benefits of partnering with a venture capitalist may be significant, there are also some potential drawbacks to be aware of, including loss of control and dilution of equity. A clear understanding of the advantages and disadvantages of venture capital funding is key to making more informed decisions for your business.

What is a VC?

VCs are individuals or groups that provide startup funding in exchange for a stake in a business. Due to the risk and unknowns associated with funding early-stage businesses, VCs often expect a healthy chunk of equity in return.

Your decision to accept VC funding may come down to several factors, which makes it crucial to understand their advantages and disadvantages.

Benefits of VC funding

If you're in the early stages of starting a business, having access to working capital can be an important lifeline—and can significantly extend your growing company's runway. While capital is its primary benefit, VC funding may provide additional advantages.

Mentorship and expertise

Many VCs have expertise in—and a passion for—specific industries. They've likely seen many businesses in your industry succeed and fail and can tap into this expertise to help guide your strategic decisions. Plus, many have strong networks and can introduce you to other key players, including potential customers and employees.

Financial stability

On average, VC-backed entrepreneurs earn much larger salaries than their bootstrapped counterparts. In fact, 91% of founders with a salary of over $100,000 were supported by venture capital. This added financial stability is a significant selling point for many entrepreneurs, allowing them to focus on growing their businesses without depleting their personal savings.

Halo effect

If you're raising capital in a funding round—such as a seed or Series A round—you'll likely partner with a lead investor. Securing a funding lead shows other firms that you have a good idea or business and that other professional investors are willing to back you. This vote of confidence can act as a positive endorsement that attracts the interest of others, including the press, potential customers and even future investors.

Disadvantages of VC funding

Dilution of equity and ownership are two primary reasons many founders are wary of VC funding. If you pursue multiple funding rounds, you may run the risk of losing the majority stake in your business. Plus, lead investors often request board seats and voting rights, which may present a future risk if their vision doesn't align with yours.

There are a few other reasons founders may choose not to accept this type of startup funding.

Loss of control

While not all investors are the same, some may have strong ideas about how your business should operate—and these may not always align with your vision as a founder. In some cases, this can significantly impact your business's fundamental mission and goals.

Pressure to scale

While many investors are motivated by a passion for helping entrepreneurs achieve their goals, most share another objective—to get a return on their initial investment. It's important to remember that VC funding may come with the pressure to scale fast and achieve profitability. In cases where this pressure is unrealistic, it may increase your risk of failure.

Conflicting expectations

Business success may not mean the same thing to you and a VC. Investors are interested in returns and expect management to deliver—and understandably so. For some businesses, this may result in a liquidity event like an initial public offering, or IPO. In other cases, VCs may push for a merger or acquisition, which may not be the direction you had envisioned for your company.

The bottom line

While startup funding can be a game changer for your business, it's important to make your decision carefully. Evaluate the advantages and disadvantages of venture capital funding, and take the time to explore other small business funding options.

If you choose to pursue VC funding, look for an investor who understands your industry and whose vision and values align with yours. Conduct due diligence on all prospects, and assess each one's track record. Seeing how they've treated similar companies in the past can be a solid gauge of what you might expect. Most importantly, always seek legal and financial guidance to ensure you're making an informed decision.